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Under the Banyan Tree – Luxury unboxed with Erwan Rambourg
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Global Head of Luxury and Consumer Research Erwan Rambourg joins Herald for a lively chat on the state of the luxury market across Asia and beyond.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:33
Speaker
Welcome to Under the Banyan Tree, where we put Asian markets and economics in context. I'm your host, Harold van der Linde, Head of Asian Equity Strategy here at HSBC.
Luxury Market in Asia: Demographics and Trends
00:00:43
Speaker
Today, we'll be taking the pulse of the luxury market in Asia and around the world with a special guest.
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Erwan Ramburg is our Global Head of Luxury and Consumer Research, he's based in London. We're talking demographics, innovation, corporate change, and something called greedflation.
00:01:00
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Plus, how did COVID spark an industry reset and does anyone actually need luxury goods? Spoiler alert, the answer is no. Let's get the conversation started under the banyan tree.
Impressions from Singapore and China
00:01:22
Speaker
Erwan, thanks for coming on to the podcast. It's a pleasure to be with you today. Fantastic. So Erwan, in your world of luxury, you've got basically two behemoths. You've got the US market, that's a big buy of luxury, and actually it's the Chinese market.
00:01:35
Speaker
So you're here in Asia to get a bit of a feel what is going on, right? So what are your general impressions? you where Where did you go? You went to Southeast Asia and you went to to China? Yeah, I spent a week in Singapore and then I spent a week. We have this traditional um week-long China tour. With all kinds of luxury investors, right? Absolutely. So we had about 12 investors and we met.
00:01:56
Speaker
A lot of brands, a lot of shopping mall operators, consultants, experts and the like. So you went into the stores, but you also saw the management of these brands. Absolutely. What sort of companies are we talking about? We're talking about international brands like like the LV Majors and Cartiers and listed and non-listed. Listed and non-listed. It's um you know easier with investors to see privately held companies and experts and consultants and the like. And I have to say we do this once a year.
00:02:21
Speaker
Last year was a bit depressing. This year was quite uplifting. so I'm not implying people are bullish, but you know clearly the tone has been significantly more constructive. So that means sales are better now. Is that across the whole region? Is that also is the Southeast Asia?
00:02:36
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Or is that only China? Or is there a bit of a differentiation there?
Luxury Trends in Southeast Asia and China
00:02:40
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I think um the feedback when I was in Singapore was that Southeast Asia is probably the only region with Europe which is not improving. Mm-hmm.
00:02:49
Speaker
It's not deteriorating, but it's not improving. It's going sideways. um Whereas if you look at greater China, there you really see an inflection. So we're not calling out growth. We're calling out improvement. So it's it's what we would call the second derivative of growth. The growth of growth is improving. yeah Meaning if your brand was collapsing three quarters ago, it no might it might still be declining, but significantly less so.
00:03:12
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And if your brand was flattish three quarters ago, you're probably now growing. So the direction of travel, if you want to put it that way, is is very positive. Yeah. And so Southeast Asia, not so strong. China, a little bit better. Yes. What about the different layers of brands? So you've got keep it very simple for myself.
00:03:28
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You've got the super high brands. You've got medium brands. I always think you got low end brands, right? Low end brands are entry level brands. Is that a reasonable way to think about it? And what are some of the brands? How are their positions? And is there differentiation between these brands from what you've heard on
Macroeconomic Impacts on Luxury Brands
00:03:42
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your trip? Yeah, I think so. What we pointed to in terms of big issues in the sector were essentially three factors hitting. One was macro.
00:03:49
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um And we haven't really picked up that macro is improving. So the economy is not really doing that well yet. So yeah that's not really stimulating. Essentially, if you look at the property market, if you look at youth unemployment, that's still quite hurtful. Yeah.
00:04:03
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um in China. The second element is what we call greedflation. So this idea that many brands post-COVID got a bit ahead of themselves um by increasing prices way too quickly.
00:04:14
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and And that sort of alienated quite a few consumers. And the third issue was the lack of creativity. So if I take your classification of high, middle, low, yeah low access price points, value type um brands are actually doing quite well um because they're an afterthought.
00:04:33
Speaker
the super high-end brand. Give me an example of of one of these lower-end brands. So these are, if you look at the private um ah part, you can look at Nanchant or Tory Burch. If you look at um some brands that are a part of listed companies, you can look at Coach, for example.
00:04:48
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um What Americans would call affordable luxury. ok um So those are resonating, those are doing well, and they've been reasonable in terms of prices. At the other end of the spectrum, you have ah the very high-end brands.
00:05:01
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So think about Brunello Cuccinelli, think about Hermès, Think about and Cartier Van Cleef and the hard luxury, meaning jewelry side of things. Those are also doing quite well. Those that are stuck in the middle are, I would say, the poster children in terms of, again, greedflation and a lack of innovation. So you can think about Dior. You can think about Gucci.
00:05:23
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um You can think about Saint Laurent, the new name of Yves Saint Laurent. Yeah, help. and And those needed to reinvent themselves. And you've had some trading up and trading down, but the middle has been squeezed.
00:05:35
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Actually makes me wonder on your side if there are any more macro-related issues to explain why the middle would be
Consumption Trends in China
00:05:44
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squeezed. Well, two things come to mind. First of all, if the economy is weak, you would think people would trade down in most goods. Although maybe luxury, the dynamics are different. So I can understand that that would already support the low rent in the luxury market more so than say in the middle end.
00:05:59
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But I think there might be something else going on because what we had, in particular in China before COVID, was the rise of the empty nester. So the average Chinese was getting into their 40s. There was a lot of people moving from, say, into the bracket of 45 to 60.
00:06:14
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That meant that their children were ah university age, if you want to put it like that. They left home and these people were there for empty nesters at home. And these people had left university in 1995, had benefited from the rise of China, bought their property in 2000. Yeah, so property come down, but I mean, they bought 20 years, 25 years ago. So they were well in the money.
00:06:34
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and They in a very comfortable sort of situation. And I think what we saw prior to COVID is that they would tell to their children, hey, you can you can buy some luxury. Buy your Celine bag or whatever you want to the children, right?
00:06:48
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Then COVID happened and that was a sort of disruption. So we can't really see too much what happened there. Everything was down. And now COVID is over. I think that empty nested story might come back, but in a different sort of shape because these children were university age prior to COVID. Now we've all got a little bit older. They have their own job.
00:07:07
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So now the dad might say, listen, you buy your own bag or you buy your own shoes. Yeah, you're 26. You sort yourself out. It's time for me to completely take care of myself. So I travel. I want to go and stay in nice hotels. And maybe that explains why that high-end and luxury is doing so well.
00:07:24
Speaker
I'm going to buy my own nice watch for my wife or whatever I buy, right? i think um yeah I think the lack of creativity and the so-called greenflation also likely accelerated ah move away from product accumulation to
Shift to Experiential Luxury
00:07:38
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experiences. Because if that handbag is pretty much the same yeah as it was three years ago but it's 60% more expensive, why bother?
00:07:45
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um And indeed, you would look at those 3,000, 4,000 euro equivalents and you'd rather go travel – go to a nice hotel, go to a Michelin store restaurant, you know, accumulate um memories and experiences rather. No one needs yet another handbag if it's not compelling.
00:08:02
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So this brings me back to the reality that luxury ah serves no purpose but to put a smiley on your face and to and to basically, said says right um you know, help you have a better outlook. so So the reason I came back from this China trip ah more constructive is, again, this idea that no one needs luxury. It's just Escapism, you know, it it enables you to project a better future. And on our trip a year ago, very clearly the mood music was was down, was quite depressing.
00:08:32
Speaker
Again, I'm not saying ah the people I met in Shanghai and Wuhan and Hong Kong were bullish, but they're clearly more constructive. I think three, four quarters ago, luxury managers were deer in the headlights. They didn't know what was hitting them. They were a bit in a panic. The same people today, you know, they've made a few changes in their teams, in their retail footprint, in their product assortment. And very clearly, there's a brighter future ahead.
00:08:54
Speaker
Yeah, and that growth will hopefully then come back and depends on the macro sort of stuff as well, of of course. What about some of the other regions in Asia, like Japan and Korea, they're a relatively big consumer
Luxury Dynamics in Japan and Korea
00:09:06
Speaker
market as well, right? um So the the Japanese local market was quasi-dominant actually 20 years ago for luxury. You know, 20 years ago, luxury used to be a European sector with a strong Japanese following. The rest of the world hadn't discovered.
00:09:19
Speaker
The Japanese consumer is still quite influential. um Japan in 2024 saw a boom, which was not related to the local a consumer, but more to price arbitrage with the weakness of the yen.
00:09:32
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So you had a lot of tourists, Chinese, but also American, European, other Asians, you know, just playing that price arbitrage, that has now reversed with the yen stabilizing. So year on year, Japan is down quite a bit. But again, you're not completely losing that consumer because that consumer now is staying at home, you know, spending in China.
00:09:54
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or other parts of the region. So actually Japan is still quite relevant. Korea is a very bright spot right now. well Which is surprising because it's, to your point, not as if it were a small market. It's a pretty sizable market for luxury.
00:10:09
Speaker
But Korea, and maybe it yeah I'd love to have your view on this, but Korea seems to be somewhat correlated to the US market in the sense that when US markets, equity markets are strong,
00:10:21
Speaker
it seems that the Korean equity market is also strong and that's helpful in terms of you know recruiting at the future cohort of consumers. that's That's actually interesting. I never thought about it. But it is right that the Korean market has got a very strong relationship with the U.S. because Korean companies basically build and and make stuff for the global economy.
00:10:43
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So the U.S. s is a very big market for them. And therefore, if the U.S. goes up, Korea tend to be as well. And another thing in Korea is, of course, that we see across the whole of Asia, including my nieces and in Jakarta.
00:10:54
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They're flying to Korea because that's where you buy your creams and your your cosmetics and these sort of things. And there's this sort of, ah how you, they call it, it the the Korean sort of soft power that has developed over the last decade or so.
00:11:06
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so So we've picked up some enthusiasm linked to equity markets in Korea. People keep on telling me about crypto. I'm always a bit wary when I hear people in the U.S. telling me about crypto because i I don't think it's an important driver for luxury sales.
00:11:20
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It's seemingly in Korea, youth ah wealth is somewhat more tied to crypto than in the U.S. And, you know, recently you've had a lot of excitement as well. So It is surprising because, again, Korea is a big market for luxury, but it's doing very well.
00:11:35
Speaker
Fantastic. So basically, we got demographics. We got greedflation. It's a new word for me. I like that one. ah We got kind of different regions doing very differently. That sets the stage to base.
00:11:46
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um I suggest we take a break now. And then I want to come back and look a little bit more deeper into some of the companies that you look at because there's been all kinds of M&A and new Chinese companies emerging. So let's take a look at that.
Post-COVID Luxury Market Adjustments
00:12:06
Speaker
So, Erwan, there's been a lot of kind of changes. You talked about mid, low and high end in luxury, but there's been all sorts of M&A companies buying each other. You also mentioned sometimes lack of innovation that might be something to do with it.
00:12:21
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And you spoke a bit about kind of management and design is that that role of the kind of famous designer is seemingly changing as well. ka Can you enlighten me a bit on that? Yeah, there's been a lot of change because I think you had a difficult post-COVID digestion phase, if I can put it that way. You had a boom right after COVID where people were queuing up to buy luxury. And you thought, oh, well, if if she's queuing to buy my products, presumably I've got pricing power. So that led to greenflation. yeah And because she was queuing to buy your products, you thought, I have the right product.
00:12:51
Speaker
And actually, you were wrong on both fronts. As you say, it's all about pleasure. there is no yeah There's no goal in luxury. It's just about getting it and enjoying it and feeling good about Absolutely. And so that led to a bit of a reckoning where a lot of the groups, um you know, very rapidly changed brand CEOs to reboot and changed designers in the the case of fashion, um um you know, led companies. And this season of, you know, there's been a lot of press around the Milan and the Paris industry.
00:13:22
Speaker
fashion shows, you had ah more than 50 new designers presenting for the first time on their given brand. So, of course, the ones that have been highlighted the most have been Chanel, have been Tior, have been Gucci, where you have high hopes.
00:13:38
Speaker
And I'm quite hopeful because the reality of what went wrong in luxury over the past two years is a lack of traffic. You know, if it's overpriced, if it's repetitive, why would I push the door?
00:13:49
Speaker
And so as a consequence, traffic came down dramatically. And the way I think about 2026 for the space is you finally are providing excuses for that consumer to come back. She will push the door.
00:14:03
Speaker
Will she buy the latest designs from Gucci, Dior, Chanel? doesn't really matter if she buys that. What matters if your sales associates are trained appropriately is that she pushes the door.
00:14:16
Speaker
If you're good, whether she buys that or something else, doesn't really matter. You'll convert her. It's a bit like Vuitton Beauty. Vuitton launched Beauty with a very controversial approach where they have the highest-priced lipstick on the planet. It's about $160, which is like twice the price of Hermès. So people are saying, oh, what a shame, et cetera.
00:14:37
Speaker
there Is Vuitton in the business of selling lipsticks? Of course not. They just want to generate that traffic. And once you're in store, if you have sticker shock and that lipstick is too expensive for you, It's okay. Harold, let me show you a pair of sneakers. Let me show you a small. I'm not so big in lipstick anyway. I was about to say.
00:14:53
Speaker
But the idea generate that interest, generate that traffic, have her come back to the store, and I will – it's my mission as a sales associate to convert her on that or something else.
00:15:05
Speaker
And in Asia, are these sales associates trained for that ah as as good as they are in Europe or maybe
Rise of Chinese Luxury Brands
00:15:10
Speaker
even better? I don't know. is that Yeah, absolutely. i think I think a decade ago, um actually in China, local Chinese consumers were quite distrustful. That has flipped completely because it's a high priority for luxury companies.
00:15:25
Speaker
you you know I was mentioning ah the Vuitton beauty launch. It was actually a China exclusive before they started to roll it out elsewhere. China tends to get better assortment, better advice from ah beauty advisors or sales consultants. for the well um and And they tend to get first dibs, if I can put it that way. And we also see now that Chinese luxury brands are are ah rising, right? In 2007 or 2008, you had the first rise of Chinese sort of brands, but it was more in footwear and in in shirts and these sort of things. And some made it, some didn't do very well. But now in luxury, we also see Chinese brands coming in, right? And you visited some of them in their stores. Yeah, absolutely. so So I still don't really see an alternative to, let's say, Vuitton, Chanel, Gucci, Dior.
00:16:10
Speaker
and alme But we do see a few things happening that are really interesting. The emergence of Laupou, for example, in jewelry. What do they do? They are – it's jewelry and it's gold. So so it's essentially gold-based jewelers.
00:16:23
Speaker
They are neither a commodity seller like you might describe Chautaifouk or Lugfouk, very big. Yeah, try those are Hong Kong companies that originated Hong Kong, but runs jewelry stores, a whole chain of stores in mainland China, right?
00:16:40
Speaker
Yeah, actually, they have several thousand stores in mainland China. And you can buy jade-based and gold-based products, essentially. But they will be they will come across as being a commodity seller. yeah um So very different from some of the Western brands like Cartier, Bulgari, Tiffany, for example.
00:16:57
Speaker
And Laupu is sort of a hybrid, meaning they are gold-based, but they have designs that really resonate with the Chinese culture. And their prices are somewhat also a hybrid, you know, between commodity sellers and Western imported brands.
00:17:12
Speaker
So very, very fascinating business model. There's another brand in and in a completely different fashion. ah Vertical, which is ah called SONGEMON, S-O-N-G-M-O-N-T, which is affordable ah handbags. Think about a Pollen or a Longchamp or a Coach or a Michael Kors or a Tory Burch.
00:17:32
Speaker
It's that sort of segment. It's about an eighth or a tenth of the price of a Vuitton or Dior or… um Gucci handbag. So it's not a direct competitor. It's sort of, you know, my first branded handbag if I'm an 18 year old, ah which possibly serves in terms of acceptance of paying up for branded goods.
00:17:52
Speaker
I don't think it's interesting because they must be pushing somebody else in the market to away. Right. So those middle brands that you spoke about at the very beginning, yeah they're not doing so well. But part of the reason might well be because there's more competition there.
00:18:03
Speaker
Yeah, I think if you go back to the idea of greedflation, as you went too high too quickly, you've created what US investors would call a lot of white
Innovation and New Designers in Luxury Industry
00:18:10
Speaker
space. And and you know you've helped lower position brands to to actually step up and and emerge.
00:18:16
Speaker
Well, this is incredibly interesting, Erwan. So basically what I've learned is that COVID has been a reset for the industry. People initially thought when suddenly everybody came back into luxury that they could reprice themselves.
00:18:28
Speaker
That has not worked out very well. But what you now see is that They have to be more innovative and some of the brands can some struggle. And we now see Chinese brands coming in. So there's a sort of a lot of M&A in the industry as well and new designers. So there's a whole new sort of luxury industry slowly emerging coming out of this.
00:18:47
Speaker
And we're exiting complacency and we're entering a more hopeful era, I would say.
Conclusion and Future Outlook
00:18:53
Speaker
Fantastic. Thanks a lot. I've learned a lot today. Thanks for coming on to the Banyan Tree and to hope that maybe next time you come through the region again, we can pick it up again and see what has changed then.
00:19:03
Speaker
With pleasure. Hope to see you soon. And that brings us to the end of another great conversation here in the Hong Kong studio. A pleasure as always having you with us. Under the Banyan Tree is an HSBC Global Investment Research production and our producer is Graham Mackay.
00:19:17
Speaker
We'll be back again next week. In the meantime, give our sister podcast, The Macrobrief, a listen for the latest on economic trends shaping investments around the world. Take care. Till the next one.
00:19:57
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.